OCCUPATIONAL PENSION FUNDS SYSTEM IN GREECE
OCCUPATIONAL PENSION FUNDS IN GREECE
BY
PANAGIOTIS A. STAMATAKOPOULOS* AND NICHOLAS E. FRANGOS*
ABSTRACT
The present article evaluates the possible government tax losses caused by the people who participate in the Occupational Pension Funds (OPFs) in Greece due to the fact that contributions are tax deductible. The final aim is to highlight a configuration model so as to combine both occupational and social security pensions in order to moderate and reduce the government tax losses presently and in the future.
1. INTRODUCTION
The establishment of OPFs was possible in Greece after law 3029/2002 was ratified. Moreover, this law defines their supplementary role in relation to social security funds. Particularly, they are able to provide insurance against risks such as old age, death, infirmity, occupational accident, illness, unemployment. An Occupational Pension Fund can be established by enterprise or employee sector, on the initiative of employees or employers or by agreement between both, with a minimum number of 100 participants by enterprise or sector of profession. The law 3029/2002 also determines the operation of OPFs according to the funded system and not to a Pay As You Go (PAYG or PAYGO) system like Social Security Pension Funds. It also refers to the investment framework and the strategy that OPFs must follow under defined contributions.
Tax incentives are given to participants in OPFs according to the Income Tax Code (Law 2238/1994). The total amount of contributions is tax-deductible, in cases of voluntary participation in funds established by law (OPFs). As for legal entities, the contributions to OPFs by enterprises are deducted from the gross income after they decide to participate. Therefore, the contributions to an OPF become mandatory.
* Department of Statistics, Athens University of Economics and Business, Patission 76, 10434, Athens, Greece. E-mail for correspondence and
At first, we examine the cash flow in OPFs which provide the retirement lump sum or the pension, and then we attempt the projection of this cash flow in the future. During the next years the number of participants in OPFs is expected to rise because of the tax reliefs that occur from participating and the benefits of a funded system. So far the established OPFs in Greece is as follows:
· Occupational Pension Fund of Hellenic Post - Establishment 6/9/2004, Official Journal of the Hellenic Republic 1364/B:
· Occupational Pension Fund of Economists - Establishment 26/8/2004, Official Journal of the Hellenic Republic 1307 :
· Occupational Pension Fund of Geotechnicians - Establishment 4/7/2006, Official Journal of the Hellenic Republic 818/B:
· Occupational Pension Fund of Air Traffic Controllers - Establishment 29/5/2009, Official Journal of the Hellenic Republic 1028/B
· Occupational Pension Fund of Hellenic Department of International Union of Police - Establishment 4/9/2009, Official Journal of the Hellenic Republic 1903/B
· Occupational Pension Fund of Casino Employees (originally known as auxiliary pension fund of Casino Employees) Establishment year 2000
The OPFs of Economists and Geotechnicians, being the first established, constitute a typical example of increasing participants in OPFs. The following chart (Chart 1) shows the increase in participants since 2007.
Chart 1
2. GOVERNMENT TAX LAWS
The research on the government tax losses of the participants in the OPFs involves the assessment of their tax brackets and the analysis of their contribution levels to the OPFs.
Concerning the assessment of the participants tax brackets, we need to take into consideration statistics provided by the Ministry of Economy and Finance about the average declared income per profession, even though the tax law is expected to be modified during 2010. The following charts (Charts: 2,3) illustrate the average declared income from primary and secondary activity of each profession for the year 2008.
Chart 2
Chart 3
Consecutively, the recording of the level of contributions and the study of the participants in OPFs (age, place of residence, total dependents, income, etc.) will help to better estimate and predict of the future flow of contributions into the funds. Moreover the statistics and data that OPFs provide to the National Actuarial Authority will produce better results and estimations regarding their viability. A featured example of such statistic chart is the following provided by the OPF of Geotechnicians, describing the age distribution of members (Chart 4), and the amount of contributions per age group (Chart 5).
Chart 4
Chart 5
3. INVESTMENT POLICY OF OPFS
The evaluation of government tax losses can be made annually, and in total for each participant at the time he exits the fund receiving his lump sum, or retirement pension. In order to complete the above theory we need to combine the statistics provided by the OPFs with the investment portfolio that will comply with the law 3029/2002. This law defines:
a) up to 70% in shares, negotiable securities treated as shares and corporate bonds traded on regulated stock markets.
b) up to 30% in assets denominated in currencies other than that which obligations are given.
So far the investment portfolio of OPFs is risk averse, as expected. Initially it was limited to time deposits in state banks. Afterwards, investments in bonds of major companies and Greek government were added and eventually OPFs created a mutual fund managed by S.A. Mutual Fund Management Companies. The following charts (Charts: 6,7) show the interest rates of the mentioned time deposits for the OPFs of Economists and Geotechnicians during years 2006 - 2009.
Chart 6
Chart 7
According to the investment policy of the funds, our research focuses on estimating future yields of a conservative portfolio. We use the geometric Brownian motion (GBM) in modelling stock investments. The estimated future yields will be used in order to calculate the accumulated fund (lump sum) of each participant. In the long – term, government tax losses at the time of this person’s exit from the fund will be the difference between two different forms of investment. The first form refers to a person who participates in the OPF of his profession and benefits from the tax-deductible contributions. The second form concerns the same person who doesn’t participate in the OPF of his profession, instead he pays his declared income tax and invests the same amount of money minus the appropriate tax. The difference between the two forms considering the increasing number of participants in OPFs and the increase of their contributions is displayed in the following chart (Chart 8). This chart is an example which shows the spread over time that would occur between the accumulated funds.
Chart 8
4. EXAMPLES
The above research is better understood by using an example of three people of different ages we examine the results assuming they follow both investement plans.
The three mentioned people voluntarily participate in the OPFs of their profession and their ages are 25, 30, 35. The following hypothetical table (table 9) indicates their annual income up to the age of 65 with a 3% and 4% increase rate annually.
Annual Income Every 5 years25 / 30 / 35
Years / 3% / 4% / 3% / 4% / 3% / 4%
0 / 15.000 / 15.000 / 20.000 / 20.000 / 25.000 / 25.000
5 / 17.389 / 18.250 / 23.185 / 24.333 / 28.982 / 30.416
10 / 20.159 / 22.204 / 26.878 / 29.605 / 33.598 / 37.006
15 / 23.370 / 27.014 / 31.159 / 36.019 / 38.949 / 45.024
20 / 27.092 / 32.867 / 36.122 / 43.822 / 45.153 / 54.778
25 / 31.407 / 39.988 / 41.876 / 53.317 / 52.344 / 66.646
30 / 35.348 / 46.780 / 47.131 / 62.373 / 58.914 / 77.966
35 / 40.979 / 56.915 / 54.638 / 75.886
40 / 47.505 / 69.245
Table 9
We assume that these three people are willing to contribute 4% of their annual income in OPFs and become participants, with a savings trend of 6% annually. According to the income of table 9, their contributions are shown in table 10, where it is obvious how the saving trend and the increase in income affect the contributions in the long term. The initial 4% has risen to 22% - 27% after 40 years of participation in the OPF regarding the 25 year old participant.
Annual Contributions to OPFs25 / 30 / 35
Years / 3% / 4% / 3% / 4% / 3% / 4%
0 / 600 / 600 / 800 / 800 / 1.000 / 1.000
5 / 867 / 932 / 1.156 / 1.242 / 1.445 / 1.553
10 / 1.252 / 1.447 / 1.670 / 1.929 / 2.087 / 2.411
15 / 1.809 / 2.246 / 2.412 / 2.995 / 3.015 / 3.744
20 / 2.613 / 3.488 / 3.485 / 4.651 / 4.356 / 5.814
25 / 3.776 / 5.416 / 5.034 / 7.222 / 6.293 / 9.027
30 / 5.068 / 7.702 / 6.757 / 10.269 / 8.446 / 12.837
35 / 7.321 / 11.960 / 9.761 / 15.946
40 / 10.576 / 18.571
Table 10
The government tax losses in our example based on the following table of tax brackets are shown at table 11. This table highlights that the bulk of government tax losses consists of participants in high tax brackets.
Tax Brackets15% / 25% / 35% / 45%
15 - 30000 / 30 - 50000 / 50 - 75000 / 75000 +
Annual Government Tax Losses
25 / 30 / 35
Years / 3% / 4% / 3% / 4% / 3% / 4%
0 / 90 / 90 / 120 / 120 / 150 / 150
5 / 121 / 128 / 161 / 171 / 201 / 213
10 / 175 / 199 / 233 / 265 / 485 / 552
15 / 252 / 309 / 560 / 686 / 700 / 857
20 / 364 / 799 / 809 / 1.065 / 1.012 / 1.863
25 / 877 / 1.240 / 1.169 / 2.315 / 2.046 / 2.893
30 / 1.267 / 1.926 / 1.689 / 3.594 / 2.956 / 5.777
35 / 1.830 / 4.186 / 3.416 / 7.176
40 / 2.644 / 6.500
Table 11
In the second form, the three people invest their money individually after paying their income tax. Consequently, the annual amount of money that they have available will be proportionally decreased compared to the contributions in the first case. The annual investment deposits in the second form are shown in Table 12. The assumptions that we made in the case of OPFs, about initial saving rate 4% and saving trend at 6%, remain the same in the second investment form.
Annual Investment Deposits25 / 30 / 35
Years / 3% / 4% / 3% / 4% / 3% / 4%
0 / 510 / 510 / 680 / 680 / 850 / 850
5 / 685 / 725 / 913 / 967 / 1.141 / 1.209
10 / 989 / 1.126 / 1.319 / 1.501 / 1.454 / 1.656
15 / 1.429 / 1.749 / 1.681 / 2.057 / 2.101 / 2.571
20 / 2.064 / 2.396 / 2.428 / 3.194 / 3.035 / 3.461
25 / 2.631 / 3.720 / 3.508 / 4.299 / 3.800 / 5.373
30 / 3.801 / 5.777 / 5.068 / 6.113 / 5.490 / 7.060
35 / 5.491 / 7.774 / 6.345 / 8.770
40 / 7.932 / 12.071
Table 12
According to our analysis so far we can see in the long term, present and future values of the annuities for the three people of our example. These values are calculated in the retirement for each person, along with the government tax losses that result from the combination of the above investment forms. The rate of return used in table 13 is 6% and the discount rate is 5%.
Present Values / Future Values3% / 4% / 3% / 4%
Participation in OPFs / 25 / 48.002 / 66.382 / 337.935 / 467.329
30 / 53.704 / 70.929 / 296.233 / 391.246
35 / 55.205 / 69.723 / 238.594 / 301.337
Individual Investment / 25 / 38.525 / 49.602 / 271.213 / 349.196
30 / 41.320 / 51.314 / 227.922 / 283.051
35 / 41.160 / 49.176 / 177.889 / 212.537
Government Tax Losses / 25 / 9.478 / 16.780 / 66.722 / 118.134
30 / 12.384 / 19.615 / 68.311 / 108.195
35 / 14.046 / 20.546 / 60.704 / 88.800
Table 13
The following chart shows the amount of contributions of the 25 year old person for both investment forms along with the annual government tax losses. What is most important in chart 14 is the long term increasing rate of government tax losses caused by the different tax brackets of this person (red curve).
Chart 14
The difference between the two curves of contributions and deposits, OPFs and individual investment, can be decreased with a formula which combines the social pension received by the participants at retirement and their occupational pension. The precise combination will result from a reduction in the social pension or with the form of a variable tax on the contributor’s income, taking into account the tax benefit rate from participating in the OPF of its profession. A hypothetical formula that could be proposed is the following: